Predicting energy prices using a digital crystal ball

10 October 2016

UPM’s Energy Market Analysis team uses highly sophisticated analysis tools to predict future energy price developments in the markets.

Christian Hoffmann, Director at UPM Energy, responsible for corporate-wide energy market intelligence support, explains that the main purpose of energy market analysis is to provide support for energy trading and managing UPM’s energy assets.

“With the help of our proprietary market simulation tools, we are providing price forecasts and market analyses to help with decision-making about short- and long-term price developments in the markets,” explains Hoffmann regarding his team’s work.

Focus is on the Nordic and Central Europe power market, but also price development in commodity markets such as coal, gas and oil. The energy analysis team also follows trends and investigates competitors operating in these fields.

“In addition, we have to understand the regulatory environment, as well as technology developments, such as wind, solar or battery storage, to assess their impact on the market,” he adds.

Comprehensive analysis

The Energy Market Analysis team is executing short-, medium- and long-term price development analyses. In order to complete a comprehensive evaluation, the team uses a state-of-the-art database with time series and market data, also including its own data and market analysis information.

“We are using mathematic optimisation tools to produce our scenario analyses. Our work is very data intensive, so we have automated processes to get information from several external data providers into our system and analysing tools,” describes Hoffmann regarding the methods used.

“We carry out price forecasts that are based on different scenarios. Mid- and long-term analyses are built on optimisation tools that include several hundred variables, some of them even on hourly resolution.”

Long-term analyses can have a time span of up to 40 years and they also have to take into account global regulatory and political changes in the international environment.

“Our world is becoming more and more interconnected, so we have much more information available compared to previous years. With this additional information, it is possible to better predict markets and prices. The challenge is to understand what kind of information would be relevant and meaningful for our purposes,” says Hoffmann.

Fluctuating energy prices

Predicting future energy prices is a difficult task. In the Nordic markets especially, electricity prices are most vulnerable to weather and hydrological conditions.

“Our short-term analyses are more weather-driven. Due to the increasing share of intermittent power generation, i.e. wind power, changes can affect electricity prices very quickly. Daily price variations can easily be up to 100 euros per MWh. It’s our task to anticipate these changes that our production could fully benefit from and optimise the use of our assets.”

For example, in Germany there might be hours of negative prices during a day because of high solar and wind power production, as traditional power plants cannot adapt to change and reduce their output that fast. Then electricity users will even get paid if they are able to consume that surplus.

Consequently, when prices are rising very high during a week, our mills could reduce production for a couple of hours to decrease energy costs. “If we can support this flexibility, it brings value to the whole company,” says Hoffmann.

Service for internal stakeholders

“Our service portfolio for energy market analysis covers support and guidance to create value in trading and hedging, but also enhancing energy business decision-making and development. The market analysis service also includes different market research reports tailored for specific end users or groups.

“After our results, we create our price forecast and view to discuss with our trader and portfolio managers who are performing transactions in the market,” explains Hoffmann.

He adds that price forecasts are not only used in trading and hedging, but also support different business processes from management teams up to investment decisions and financial forecasts of our EBITDA.

Hoffman welcomes the UPM Energy team’s good spirits. The company has strong competences and a strong track record for value creation in physical and financial electricity trading.

“We have a highly professional and efficient organisation where each member has a lot of freedom to develop their own expertise and ideas. We also put these new proposals into practice very quickly, motivating and engaging our teams to find new solutions and ideas to work in the market.”

“In addition, we have several cross-team projects for energy that bring different people from different teams together to develop and detect new business ideas. We have a very positive collaboration here.”

Versatile energy production

UPM Energy has a cost competitive, low-emission and flexible electricity generation portfolio in Finland that mainly consists of nuclear power, hydropower and some condensing power plant capacity.

“UPM Energy’s energy production is sold mainly to Nord Pool, the Nordic spot market. Other business areas within UPM will buy the needed share of consumption from the markets. In this way, it is more competitive and, as a corporation, we add more value to the company than just selling energy in internal pricing,” says Hoffmann.

Hoffmann admits that, due to great uncertainty in the electricity markets, it is difficult to hit the exact value in a certain day or period of time, but the job is merely to cover trends or predict incidents that might have a strong impact on prices.

“The Energy Market Analysis service’s objective is to foresee developments and make the most of these trends,” Hoffmann concludes.

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